Chinese Economic Update – 26 November 2014

PBOC moves to support growth, cuts rates on low inflation and increasing economic uncertainty

The People’s Bank of China caught investors off guard on Friday when it announced a surprise cut to both the 1 yr deposit rate and the 1yr lending rate for the first time in two years.

The benchmark 1 yr deposit rate was cut by 25 bp on Friday morning while the 1 yr lending rate was cut by 40 bp at the same time. The PBOC also indicated at the same time that it could cut rates further during the months ahead if inflation were to continue falling.

The bank’s previous reluctance to ease monetary policy came as part of a concerted effort by Beijing to rebalance the economy away from the debt funded & infrastructure investment driven growth of the past, toward a more balanced consumption driven form of expansion.

This was as the perils of the old economy were highlighted throughout 2012 and 2013 as the nation struggled to balance a housing bubble across many of the nation’s major cities, at the same time as fighting a housing market depression across some of its lesser developed areas.

However, the PBOC’s actions last week mark a shift away from this prolonged period of observation and restraint, while highlighting a willingness among Chinese policy makers to act if and when the economy is in danger of slowing too quickly.

The policy announcement helped to drive a recovery in the Shanghai Composite Index, which had spent much of the week trading sideways until Friday.

Commodity prices also reacted positively to the news, with Brent crude rising by almost $2 throughout Friday trading. However, iron ore prices fell sharply once into the new week as the Chinese policy action proved insufficient to offset concerns over rising supply over the medium term.   

SSE Composite Index // 10 Minute Intervals

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